NRP

Business Context and Reporting Period

Company: Natural Resource Partners L.P. (NRP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: NRP is a master limited partnership formed in 2002 to own and manage coal royalty properties in Appalachia, the Illinois Basin, and the Western United States. The Partnership does not operate mines; it leases coal reserves to third-party operators in exchange for royalty payments based on production volume and sales price.

Key Financial Metrics (Six Months Ended June 30, 2003)

Production Data: 21.2 million tons of coal produced during the six-month period. Average gross royalty per ton was $1.63.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased to $39.9 million for the six months ended June 30, 2003, compared to $22.5 million in coal royalties for the comparable period in 2002 (predecessor properties). This represents a 54% increase in coal royalty revenue.
• Production Increase: Coal production rose by 55% to 21.2 million tons, driven primarily by new acquisitions from El Paso Corporation and Alpha Natural Resources, as well as increased production at existing properties like West Fork and Dorothy-Sarita.
• Debt Expansion: Long-term debt increased significantly from $57.5 million at year-end 2002 to $173.65 million at June 30, 2003. This reflects the issuance of $125 million in senior unsecured notes and increased borrowings under the revolving credit facility to fund acquisitions.
• Acquisitions: The Partnership acquired over 300 million tons of coal reserves from Alpha Natural Resources for $53.6 million in April 2003. Additionally, an agreement was signed on June 30, 2003, to acquire 78 million tons of reserves from PinnOak Resources for $58 million (funds placed in escrow).

Guidance, Outlook, and Risks

Management Commentary: Management expects cash generated from operations and borrowing capacity to be sufficient for working capital and maintenance capital expenditures. The Partnership is actively pursuing additional property acquisitions, funded by its expanded $175 million credit facility and debt issuances.

Key Risks and Contingencies:

• Commodity Price Risk: Revenue is dependent on coal prices. A shift from long-term contracts to spot market sales increases revenue volatility.
• Concentration Risk: The Partnership relies on a limited number of lessees. Four major lessees accounted for approximately 57% of total revenues for the six months ended June 30, 2003.
• Environmental Liability: While lessees are responsible for environmental compliance and reclamation, NRP could be held liable if lessees fail to meet obligations and bonding companies default. An indemnity from predecessors covers liabilities up to $10 million until October 2005.
• Interest Rate Risk: The Partnership has variable rate debt under its revolving credit facility. A 100 basis point increase in LIBOR would increase annual interest expense by approximately $580,000.

Investor Verification Checklist

• Acquisition Integration: Verify the operational status and royalty generation of the Alpha Natural Resources and PinnOak Resources acquisitions.
• Debt Covenants: Review the leverage ratio covenants (increased to 3.50 to 1.00) and ensure compliance given the recent debt issuance.
• Lessees' Financial Health: Assess the financial stability of the top four lessees, which generate the majority of revenue.
• Coal Price Trends: Monitor spot market coal prices and the mix of long-term vs. spot contracts held by lessees.
• Escrow Status: Confirm the closing of the $58 million PinnOak acquisition and the release of escrowed funds.